Surprise repo rate cut

27 November 2012

THE Monetary Policy Committee’s (MPC) surprise decision yesterday to cut the repo rate by 50 basis points to 5% will bring interest rates to the lowest it has been in almost 40 years.

While the reasoning for the rate cut is solidly based on the negative performance of the global economy, and the risks this poses for South Africa, it is good news for many consumers who still struggle with pre-recession acquired debt.

It is hoped that the rate cut will help to ignite more economic growth locally and follows on the heels of several central banks lowering their lending rates internationally.

In her announcement, Reserve Bank Governor Gill Marcus, said that the bank’s inflation forecast has been revised downwards with inflation expected to have peaked at an average of 6.1% in the first quarter of 2012.

“It is now expected to continue to moderate over the next few quarters, reaching a low of 4.9% in the second quarter of 2013.

Inflation is then expected to remain fairly stable around the 5% level to the end of 2014. Inflation is expected to average 5.6% in 2012, and 5.1% in both 2013 and 2014.

“The improved forecast is mainly due to lower-than-expected recent inflation outcomes,” she said.

Nevertheless, the local economy faces some serious challenges and the Bank’s forecast of GDP growth for 2012 has been revised down from 2.9% to 2.7%, and to 3.8% in 2013.

The MPC decision was quite a surprise to the market and was the first repo rate cut since November 2010.

Marcus admitted that it would not be a silver bullet to ignite sustainable economic growth: “While it is recognised that such a move on its own will not overcome the challenges facing the economy, it is felt that it can help alleviate some of the pressures faced by some sectors.

“A sustained increase in the potential output of the economy will require a concerted and co-ordinated effort from both government and the private sector.”

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